WATCH PRICES: all China’s fault?

We are not going to trot out the figures for China and Hong
Kong, who are often accused of being the root cause of the
current crisis.

I

t is true that the Swiss watchmaking industry
has become extremely Sino-dependent,
and the political decision by one single
man, Xi Jinping, and the change of gear
by one regime have been enough to disrupt
the entire ecosystem.

But the downward trend set in motion
during the past two years (China, combined
with the other international tensions)
is, objectively, not of the same
nature as the financial crisis which
made itself felt from November 2008
to December 2009. After a brusque but
relatively brief dive of up to 25%, lasting
one year, Swiss exports suddenly
rallied, climbing more than 10% as of
January 2010, and up by more than 30%
by March.

One of the keys to the current situation
probably lies there – come 2010, things
resumed their previous course. The Swiss watch industry seems not to have learned any lessons
from what became known as the “subprime crisis”.
The steep drop in Chinese demand (or the sudden brake
applied to supply, to be more precise)
heralded quite a different crisis which,
combined with other factors, made it a
turning point: a price crisis, or rather a
crisis fuelled by price issues, but also an
identity crisis.

Source: FHS, Vontobel Equity Research

Whereas in 2010, watchmakers thought
they could carry on as before and once
again aim for the sky, things are very different
in 2017.

In China, it all began mainly for reasons
of domestic policy and Xi Jinping’s takeover
of the apparat. And in the context of
a general slowdown in Chinese economic
growth, there was also a need to reassure
the huge, emerging middle class
with guarantees of integrity, firmness and
opposition to endemic corruption.
The anti-corruption campaign, as it has
been called, is first and foremost a spectacular staging of this political ambition. And what could
be more symbolic than targeting the “watch of corruption”,
worn so proudly and ostentatiously, like a miniature portable
safe, on the wrist of the powerful, semi-powerful and
even mid-level civil servant?

But quite apart from its political role – the visible face of this
campaign – the economic aspect materialised almost simultaneously,
with the issuing of import restrictions aimed at
Chinese tourists. No more returning from world tours with
armfuls of gifts. No more wholesale distribution of business
gifts brought back from Hong Kong!

And, as Bulgari CEO Jean Christophe Babin ironically comments:
“You’re more generous when it’s not your money
you’re buying with. When Business Class is no longer available,
you’re more careful.”

Source: Hong Kong Gov. Statistics, Vontobel Equity Research

“In the last few years, Asia
and especially Greater
China have been the main
growth drivers for the Swiss
watch industry. In 2005,
Greater China accounted
for 19% of total exports and
in 2012 its share had risen
to 32%. In 2013 and 2014,
exports to China declined
somewhat, bringing Greater
China share down to 27%.” Vontobel Luxury Goods
Shop report 09-10-2015

In response to the fall in exports, the world’s factory is having to
change and focus on home demand. Hundreds of millions of
Chinese have been ordered to buy Chinese products, in China.
In launching his anti-extravagance and anti-corruption
campaign and putting the brakes on foreign purchases, Xi
Jinping flicked over the first domino. The second fell on
Hong Kong then, from hub to hub, the dominos fell as far as
Paris, Lucerne and Interlaken.

IN MARCH 2015, JULIE LAULUSA, AN ASTUTE AND
KNOWLEDGEABLE EXECUTIVE FROM THE MAZARS
CONSULTING GROUP, DETAILED TO EUROPA STAR:

“The anti-extravagance and anti-corruption campaign began to have
an impact on sales in mid-2012, although at that point the effects
were relatively mild. In 2013 things began to snowball, with the result
that sales fell sharply, by around 30-40%.
That year, sales of high-end watches were estimated at $653 million,
the same figure as 2004! This was no coincidence: the luxury
watch, a discreet and yet greatly appreciated gift, had become a
symbol of corruption. Bloggers and contributors to internet forums,
in publicising the campaign, accentuated the impact even further”.
(EUROPA STAR, MARCH 2015)

HAS THE “ANTI-EXTRAVAGANCE” CAMPAIGN PLAYED A ROLE
IN THE STYLISTIC EVOLUTION OF SWISS WATCHES?

Julie Laulusa: “The anti-extravagance campaign, the moral prong
of the anti-corruption campaign, followed a similar pattern. The
watches that came in to replace the old stock were different; stylistically,
they had no visible signs of extravagance. To give an example
of how anti-extravagance was implemented in practice, in 2013,
Louis Vuitton was forced by the Shanghai authorities to withdraw
the oversized trunks on display outside its shop.
In the view of the Chinese, a watch, and particularly a Swiss-made
watch, should be made to last; you should be able to hand it down
to the next generation. Engineering and functionality have increased in
importance.
As sales of watches intended as ‘gifts’ have dropped sharply, the
customer profile has changed: clients are buying for themselves;
they are investing, rather than spending. Little by little, the Chinese
market is maturing”. (EUROPA STAR, MARCH 2015)